Health Savings Account (HSA)
A health savings account (HSA) is an employee benefit employers provide to their workforce. An HSA allows employees to deduct pre-tax money from their payroll to pay for health care expenses.
What is a Health Savings Account (HSA)?
A health savings account (HSA) is an employee benefit program that lets employees contribute pre-tax money through payroll deductions to pay for certain health care expenses. Employees can enroll in the benefits program to reduce the costs of their health care bills. HSAs are available only with high-deductible health plans. Employers may contribute to their employees’ HSAs and will not be required to pay wage taxes on those contributions.
Why is a Health Savings Account (HSA) important to small businesses and HR leaders?
All employees want to have good health care and health insurance. With an HSA program, employers can attract talent to their company. Employee benefits are generally an excellent way to attract talent from the marketplace. With an HSA, employers can deduct the pre-tax money from their employee’s wages. This creates a win-win situation for both the employee and the employer. The employee will have a lower medical expense if they need to use their health insurance, and the employer won’t have to pay tax on this deduction, so they will save money by providing an HSA to their employees.
What is the history of the Health Savings Account (HSA)?
The first health savings accounts were discussed in the 1980s. The first plans, called Medical Savings Accounts (MSA), were tried through an experiment in 1996. With the introduction of Health Savings Accounts in 2003, the MSA was deemed obsolete, and the HSA took over all the health savings in the country. HSAs combine the concept of both Roth 401(k) and IRAs for medical expenses. The employee receives a 100% income tax deduction for their HSA contributions (in that same taxable year) to their HSA bank, and can withdraw the funds if needed for qualified medical expenses.
When can I set up an HSA plan?
If your company is offering an HSA-compatible, high-deductible health plan (HDHP), you can set up an HSA at any time. Your HSA plan’s start date depends on when you finish setting up your high-deductible health plan. Employers must finish setting up the HSA:
- On or before the 15th of the month: the employee’s plan will be eligible to start on the 1st of the following month.
- After the 15th of the month: the employee’s plan will start on the first of the month after the next (1–1.5 months later).
Employees will have until the 25th of the enrollment month to begin contributions on the first of the following month. If the employee’s enrollment is completed after the 25th, the plan will start on the first of the month after the next.
Are there contribution limits for an HSA?
The IRS places limits on the maximum allowable annual HSA contributions. Note that the total combination of employee and employer contributions cannot exceed these amounts.
The maximum annual contributions have grown yearly, both for individuals and dependents. An employee’s dependents must be enrolled in the employee’s medical insurance to qualify for the family contribution limit.
Catch-Up Contributions
Participants age 55 or older may make additional contributions beyond the maximums above:
- Single: $1,000
- Family: $1,000
Summary
A Health Savings Account (HSA) is an excellent employee benefit that employers can provide their workforce. The account lowers the health care and medical expenses the employee might experience. The coverage is funded by pre-tax money from the employee’s salary deductions held in an HSA bank. Employees can use the funds for any eligible medical expenses. An HSA can be a good employee benefit employers use to attract great talent while also helping employees reduce their medical expenses.
